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An Update on Compensating Sales Reps for Profitable Selling

One way that companies can protect and expand profit margins is to connect sales profitability to their sales force incentive compensation plans. Sound familiar? Interested in learning more? Please read on to learn about results of a recent touch point survey and implications for future sales compensation planning.

Recently, we conducted a Webinar for financial executives interested in evaluating the use of profit measures in their company’s sales incentive compensation plan. This session was hosted by Proformative, the largest on-line resource and professional network for senior finance professionals (http://www.proformative.com/) and sponsored by Xactly, the leader in the field of incentive compensation management. A condensed version of the slides used during the presentation are available at: Presentation Slides.

During the course of the Webinar, we asked participants several questions about their company’s practices relative to using profit measures in sales incentive compensation. There were 123 responses to our polling questions. Here’s a summary of the survey results we found most interesting:

  • Sales – Finance agreement on including a profit measure in the plan. We have seen other surveys report Sales – Finance agreement on a profit measure in only 33% of companies.   Our webinar participants indicated 69% agreement between their Sales and Finance executives. Perhaps this was a biased group. Or, alternatively, we believe a “sea change” is underway with respect to an increasing number Sales and Finance executives coming to realize that in low growth markets (particularly in North America) an important way to sustain and increase profitability is by rewarding the employees – sales teams – directly responsible for it.
  • Current state of incenting and rewarding sales people for profitable selling. 20% of our participants reported their company has been rewarding sales people for profitable selling for some time. However, 39% indicated they reward for profitable selling but doing so needs improvement.
  • Incentive technique associated with profitability measure. Among the companies that include a profitability measure in the sales incentive plan, how is it associated with the incentive payout? The three highest responses were: 1) 19% indicated it’s a standalone bonus; 2) 17% indicted the profit measure is a hurdle or gate for payout on other measure; and, 3) 12% indicated it’s a “multiplier”, i.e., incentive pay earned based on another measures is increased based on performance in the profit measure.

An underlying assumption when considering the use of a profitability measure in a sales incentive plan is that negotiations with customers is a key task and reps have discretion over discounts and contract terms. When that is case, it clearly makes sense for a company to investigate the feasibility of adopting a profit measure in the sales incentive plan.

Based on our experience overall and feedback from the participants in our webinar, it appears that the number one thing holding companies back from moving ahead with the use a profit measure in the plan is not lack of agreement between Sales and Finance but rather the lack of systems and reporting capabilities. Approximately one fourth of our Webinar participants indicated that their companies cannot accurately track and report profit performance (e.g., margins) by sales made at the sales rep level. Given the advances that have been made in recent years in pricing and profitability software (see, for example: http://www.vendavo.com/profitable-selling/), our view is that companies may need to bite the bullet and step up to the investment required to equip both sellers and managers with the tools they need to execute profitable selling. Once that is done, following behind with profit oriented sales incentive plans provides the opportunity to recapture monies invested in doing so.